Mahmood Ahmadbank engages in a two-way contract with both depositors and borrowers, the
bank does not trade money for money, which is forbidden in Islam. Rather,
the bank lends money, which is put to work by the borrower, and shares
profit/loss of the invested capital. The Islamic equity system is proved to be a
mechanism of efficiency, justice, welfare and fair growth.^7 Therefore, it may
be concluded that although monetary benefits are paid to depositors in both
Islamic and conventional banks, they are not the same. Payment to depositors
by Islamic banks is variable while payment to depositors by conventional
banks is fixed.
4.2 Islamic Interpretation of Similarities and Differences of Lending
(Investment) services provided by Islamic and conventional
banks:
Table 2 shows comparative financing techniques used by both Islamic
and conventional banking system. Short-term trade financing techniques
(bay[-murabahah, bay[-muajjal, bay[-salam, and ijarah) by Islamic banks are
alleged to be similar to interest-bearing short-term lending by conventional
banks on the following grounds:
a) Fixed charges as a percentage increase with time as compensation
for violation of agreement for repayment schedule of investment
taken by the entrepreneur from the bank;
b) Dated payment obligations which may not synchronize with a firm’s
cash-flow;
c) The borrower has to make payments whether or not he is
succeeding in his business;
d) Security or mortgage is essential for investment;
e) Returns are practically calculated on the benchmark of an interest-
based bank.
Islamic banks earn profit either from investment in trading (bay[) and
leasing (ijarah) or in production/manufacturing. As a result, Islamic banks get
directly involved in trade and industry, for which Islamic banks perform
functions of both an intermediary and manager. Lack of expertise to appraise
and monitor different types of industries and long drawn court procedures
for recovery of bad loans in case of default by borrowers make Islamic banks
hesitant for long-term mudarabah or musharakah modes of lending.
Consequently, ‘bay[’and ‘lease’ modes of investment become dominant forms
of financing by Islamic banks.